Financial markets allow for the buying and selling of a broad variety of financial instruments including stocks, bonds, and commodities. In some markets, financial instruments can be traded electronically by using computer technology. The speed at which such computer technology can operate, enables high-frequency (electronic) trading—the trading of financial instruments multiple times in a short time period. High-frequency trading is widespread. Indeed, by some estimates, high-frequency trading accounts for over seventy percent of equity trades in the United States.
Today, high-frequency trading platforms and algorithms are used to trade financial instruments at such high speeds, that latencies between a trading order (e.g., “buy 300 shares of stock A”) and a response to the trading order (e.g., “order has been filled”) are often below 500 microseconds. Accordingly, high-frequency traders are able to take advantage of opportunities occurring at microsecond level rather than conventional “long-term” investing at time scales of months or years.
High-frequency traders compete with one another to take advantage of short-term market opportunities on the basis of how fast the traders can execute high-frequency trades. The faster a high-frequency trader can trade, the more he is able to take advantage of available opportunities. The speed of high-frequency trading depends on computers, networks, and software used to implement it.